House Vote Sets Up Tricky Tax Negotiations

WASHINGTON – The House and Senate face tricky negotiations on two very different versions of a tax cut called for months ago but getting renewed attention in a year-end scramble to clear the congressional agenda.

Multiple factors conspired to delay this year's tax work. Hurricane Katrina blew pending tax bills off the agenda so tax-writers could turn their attention to helping the Gulf Coast cleanup and recovery.

GOP leaders spent a good part of the fall marshaling support for their effort to shave the growth of federal programs like Medicare and Medicaid. Some moderate GOP lawmakers were less than enthusiastic about the prospect of cutting taxes amid budget deficits and emergency hurricane costs.

Lawmakers haven't given up hope of completing the tax cut this year, but there are few days left for tax writers to reconcile very different versions of their legislation.

The House voted 234-197 to pass its tax cut Thursday. The bill focuses on reduced tax rates for capital gains and dividends, preserving the 15 percent tax rate for investment income in 2009 and 2010 that otherwise will evaporate at the end of 2008.

It also would preserve tax cuts scheduled to expire in just a few weeks, including popular deductions for state and local sales taxes and tuition, along with a tax credit for low-income savers.

The Senate's version of the bill, passed last month, focuses instead on the alternative minimum tax. Their bill seeks to temporarily hold back the tax next year, when it could hit more than 17 million individuals and families with higher taxes.

The alternative minimum tax was invented to prevent the wealthy from completely avoiding taxation, but it threatens to reach into the middle class unless lawmakers act to stop it.

Senate GOP leaders tried to use their bill to keep tax cuts for investors in place for at least one extra year. The effort died in the Senate Finance Committee when a key senator, moderate Republican Olympia Snowe of Maine, withheld her support.

The Senate's GOP leaders vow that the final version of the tax cut will continue reduced tax rates for capital gains and dividends. They face virtually united opposition from Democrats, who say the alternative minimum tax should be the top priority right now, as well as lingering hesitancy among some moderate Republicans.

To add an additional complication, the budget put a ceiling on the size of the tax cut. There may not be enough room, said House Ways and Means Committee Chairman Bill Thomas, R-Calif., to do both the capital gains and dividends tax cuts and address the alternative minimum tax in one bill.

Lawmakers can complete their work in the spring if they run out of time this year, and they can make any expired tax cuts retroactive to the beginning of the year.